EU Chiefs Seeking to Stave Off Euro Crisis Turn to Cyprus

The European Central Bank’s pledge to intervene in bond markets and the prospect of an economic recovery by the end of the year are holding the three-year-old sovereign debt crisis in check. Photographer: Ralph Orlowski/Bloomberg

March 11 (Bloomberg) -- European leaders grappling with
political deadlock in Italy and spiraling unemployment in France
will turn to a financial rescue for Cyprus in an effort to stave
off a return of market turmoil over the debt crisis.

European Union leaders will meet for a March 14-15 summit
in Brussels to discuss terms for Cyprus, including the island
nation’s debt sustainability and possibly imposing losses on
depositors. That comes as Italy struggles to form a government
after an inconclusive Feb. 24-25 election and as concern over
the French economy mounts with unemployment at a 13-year high.

“We haven’t turned the corner yet, but we’re on a good
path,” German Finance Minister Wolfgang Schaeuble told
Austria’s Der Standard newspaper in a March 8 interview. “It
would be wrong at this point to change course.”

The European Central Bank’s pledge to intervene in bond
markets and the prospect of an economic recovery by the end of
the year are holding the three-year-old sovereign debt crisis in
check. Still, gridlock in Italy has raised the specter of
renewed turmoil in the euro area’s third-largest economy, while
growth has ground to a halt in France, the second-largest.

European bonds held steady last week, with Spanish debt
advancing for a fourth week and Italian yields sliding. Spanish
10-year yields declined for the ninth straight day, sliding 3
basis points to 4.73 percent at 9:12 a.m. in Madrid. Italian
yields with the same maturity climbed 3 basis points to 4.63
percent.

Euro’s Retreat

The euro retreated last week after a U.S. report showed a
falling jobless rate. It traded at $1.3012 at 9:14 a.m. in
Frankfurt to bring the decline against the greenback this year
to 1.4 percent.

In Cyprus, European leaders have yet to reach an agreement
with the International Monetary Fund and the new government amid
concern about the presence of Russian wealth on the island and a
rescue package that could approach the size of the Mediterranean
nation’s 18 billion-euro ($23 billion) economy.

Nicos Anastasiades, who took over as Cyprus’s president on
Feb. 28, will attend his first EU summit meeting this week. Over
the weekend he said proposals to impose losses on depositors as
part of a bailout package are “out of the question,” according
to the Greek state-run Athens News Agency.

“After rumors of depositor haircuts, there was some
outflow of deposits, not though to a degree which caused
particular worry,” Anastasiades told ANA March 9.

Cyprus Bailout

A bailout for Cyprus, which would be the fifth rescue for a
euro nation since the crisis began in 2009, may involve a debt
target of 100 percent of gross domestic product in 2020,
according to three EU officials who spoke on condition of
anonymity. Cyprus said in January that a rescue could push its
debt-to-GDP ratio to a peak of just under 140 percent in 2014.

IMF Managing Director Christine Lagarde has said any plan
for Cyprus should address debt sustainability in addition to
offering the country a path back to markets and economic growth.
The IMF and European leaders struggled last year to overcome
similar differences over a rescue package for Greece.

Italy’s political establishment continues to seek a way to
form a government after the country’s credit rating was cut one
level by Fitch Ratings, which cited the possibility that the
deadlock could further damage the country’s economy.

‘Political Uncertainty’

“The increased political uncertainty and non-conducive
backdrop for further structural reform measures constitute a
further adverse shock to the real economy amidst the deep
recession,” Fitch said in a statement on March 8. “The ongoing
recession in Italy is one of the deepest in Europe.”

Democratic Party leader Pier Luigi Bersani and his allies
secured a majority in the lower house of parliament. They failed
to win the Senate, where, former Prime Minister Silvio
Berlusconi and comedian-turned-politician Beppe Grillo were able
to establish blocking minorities.

Should Italian President Giorgio Napolitano avoid calling a
new election, he may consider setting up a national-unity
government, accepting a minority Cabinet under Bersani or
seeking another so-called technical government along the lines
of that overseen by outgoing Prime Minister Mario Monti.

Italy’s “urgent problems” need to be addressed and will
require “a serious effort of cohesion” and a stable
government, Napolitano said in Rome on March 8.

Meanwhile, concern is mounting over France, where President
Francois Hollande is struggling with a jobless rate that’s
exceeded 10 percent. PSA Peugeot Citroen, Renault SA and
Alcatel-Lucent SA are slashing payrolls after the economy slid
back into a recession last year and risks doing so again after
contracting 0.3 percent in the last quarter of 2012.

The sputtering economic performance will likely scupper
France’s plan to scale back its budget deficit to 3 percent of
GDP this year. The European Commission expects a shortfall in
France of 3.7 percent and unemployment to climb to 10.7 percent.